Do I need a revocable trust? While a revocable trust has become a common estate planning strategy, it is also the subject of much confusion. The late Harvard Business School professor Clayton Christiansen taught that businesses must precisely distill the objective that customers are hiring the service or product to accomplish; that is, what Christiansen termed “the job.” Businesses failing to understand “the job” for which the product or service is being hired will flounder. In this month’s update, I summarize “the job” that is being accomplished through a revocable trust, and distinguish this job from other jobs accomplished through other estate planning strategies.
A revocable trust is hired to hold the ownership of your assets so that your assets can be efficiently managed during your incapacity and transferred following your death. A revocable trust allows you, as the trust creator, (i) to authorize a trustee to manage your assets, (ii) to minimize third-party disruptions to your plan, and (iii) to maintain privacy over your assets and your estate planning objectives.
- Authorize a Trustee to Act
A revocable trust allows you to authorize one or more successor trustees, as your legal decision-makers when you are no longer able to make your own decisions. A trustee’s decisions are legally constrained by legal “fiduciary” duties to act for your benefit, during your lifetime, and for the benefit of your beneficiaries, following your death. Within the context of these duties, a trustee’s authority extends to a wide range of decisions.1
- Minimize Third Party Disruptions to the Plan
If assets are owned in a revocable trust, your trustee can more efficiently administer the plan, and avoid barriers imposed by third parties. In the absence of trust planning, the extent of your named fiduciary’s powers are limited by state law. During lifetime, the person named under your power of attorney (“attorney-in-fact”) only holds those powers provided to a power of attorney by state law.2 Following death, your personal representative must obtain the approval of a probate court, and be subject to the court’s calendar and a court’s approval of the personal representative’s requests.3 In contrast, a trustee can more easily implement the plan in the desired time frame.
- Maintain Privacy
If probate proceedings are required at your death, the extent of your assets and liabilities, as well as the identity if your beneficiaries, will be of public record. Assets owned in your trust are not subject to probate court supervision and therefore protected from public disclosures.
A revocable trust is not being hired to accomplish the following jobs:
- Avoid personal creditors. Assets owned through a revocable trust are still subject to your control. A revocable trust does not, therefore, accomplish the job of shielding your assets from your medical or long-term care expenses.
- Gift assets away. Family members or favorite charities have no legal right to benefit from your revocable trust assets during lifetime. A revocable trust does not, therefore, accomplish the job of making lifetime gifts to your family or your favorite charities.
- Avoid family disharmony. The appropriate disclosure of your estate plan to your family and named fiduciaries would reduce the likelihood of family disharmony after your death. A revocable trust holds title to your assets, but does not in itself accomplish the job of eliminating possible family disharmony.
- Avoid income and estate taxes. In the eyes of the IRS, your continued control of assets through a revocable trust means that you are still the “owner” of your assets for tax purposes. A revocable trust does not, therefore, accomplish the job of avoiding income taxes or shielding assets from potential estate taxes at your death.4
Keep in mind that many of our clients are seeking to accomplish more than one “job” in estate planning. For example, our Minnesota resident clients owning assets more than $3.0 million must hire a revocable trust to manage efficient asset transfer, and hire a lifetime gifting strategy to minimize estate taxes.
For those individuals who need to hire a revocable trust, we are glad to help. We help our clients with the implementation of the plan through a two-step process. First, we assist with the preparation and execution of a trust agreement. Second, we align the trust with the ownership and beneficiary designations.